where adjustments come from

The lot is huge, so it must be worth more, right? But how much is it really worth? Let’s look at four quick points to consider when it comes to lot size. Don’t miss the two images at the bottom of the post too. I’d love to hear your take in the comments.

Four things to remember about the value of a larger lot:

It’s about what the market will pay: The best way to know what a larger lot size is worth is to start comparing similar homes with and without larger lots. What is the price difference? If we can line up a few examples, we’ll probably begin to see a reasonable range of value emerge. Keep in mind there might not be any recent larger lot sales, but you can easily look at the past few years of neighborhood sales as well as sales in a competitive market. Value could be exponentially higher for the larger size, but then again it might be less than we’d think. At the end of the day we have to look to the market for the answer though since it all comes down to what buyers are actually willing to pay for the difference in size.

Usefulness: When dealing with a larger lot we have to consider the usefulness of the extra space. What if the larger lot size was located in the front yard? Could there be a difference in value between a huge backyard and a large front yard? What if the lot had a funky shape that made most if it unusable? What if the larger lot was located right next to the highway compared to the interior of the neighborhood? What if there was an easement running through the lot that essentially cut the usable space in half? From a value standpoint we have to consider the effective usable lot size and make sure we are choosing comps with similar utility.

New construction: Remember, builders tend to charge more for a “lot size premium” or “lot elevation premium” when a house initially sells, but this premium may or may not exist in the resale market years down the road. The owner might expect to sell for more, but what are homes with similar features actually selling for in the resale market? That’s what our focus needs to be.

The temptation to give an adjustment: It’s tempting to give a lot size value adjustment any time we see a difference in size. Thus when we see a lot that is 6534 sq ft and a lot that is 8000 sq ft, we automatically apply an adjustment. Or if we see something that is 4356 sq ft and a lot that is 6500 sq ft, we’re tempted to use a price figure we think makes sense. But we have to ask ourselves, would buyers really make the adjustment? (adjustments are supposed to be based on the behavior of the market (buyers)). It’s easy to be trigger-happy about giving adjustments like this, but we have to remember there is no such thing as an adjustment that is going to work for every single neighborhood, price range, or market. In short, if the adjustment is incredibly minor, maybe it’s better to just not give it in the first place.

I hope this was helpful. Now two quick images.

Example of Finding an Adjustment: Assume these two model match sales have a similar location, upgrades, and condition. Now how much is the extra lot size worth based on actual sales? Remember, it’s ideal to find a few examples instead of just one so our results are more meaningful.

Questions: Anything else to add? What is #5? Did I miss something? I’d love to hear your take.

It’s easy to get trigger-happy with making value adjustments. Appraisers do this and so do agents. This means whenever we see a difference between two homes, it’s tempting to give some sort of value adjustment. After all, there has to be one, right? Let’s talk about that.

My List of Adjustments (that I used to use): First off, here is the list of adjustments I used to give when I first came into the appraisal industry many years ago. Please DON’T blindly use these adjustments or any list of adjustments (unless they make sense to use). I’d like to say I was giving these adjustments because they were market-derived, but I was really giving them because that’s what I was taught to do. Are these legit?

The Problem: The problem with a list of adjustments is they won’t make sense for every house, price range, neighborhood, or market. Will the adjustments be the same at $100,000 as they would at $1,000,000? Nope.

Adjustments I would’ve given years ago: I did a condo appraisal recently, and here is an example of what my appraisal might have looked like years ago (unfortunately).

I adjusted $5000 to Comp 2 for being located on the first floor since the subject is upstairs (it’s noisy on the first floor, right?). I also adjusted $500 for each year of age difference, a $30 per sq ft for square footage, and $5000 for the subject having a garage. What’s wrong with these adjustments though? Well, first off they are all made-up. Maybe they work, maybe they don’t. How do I know there is an issue with the adjustments in this case? Well, all other competitive sales besides the ones here are around $125,000, and the canned adjustments I gave make my comp adjust out to $136,500. That’s a tell that something clearly isn’t right. Most of all, let’s keep it simple. Do buyers really pay $500 for each year of difference in the age? Or do buyers really pay $5000 for the difference between upstairs and downstairs? In this case probably not.

Here are the adjustments I actually gave:

Why I gave no adjustments:

Square Footage: The slightly different square footage really didn’t matter for the value. As I compared the 836 model and 890 model, they were selling at about the same price. I know this is a minor example, but there is a very real temptation to try to fill any difference with a value adjustment because it seems like there should be one. Yet sometimes the best thing to do is give no adjustment if that’s what it seems the market does. See this graph to compare both models (pay attention to the most recent sales). A similar instance is when we see an open floorplan at say 1500 sq ft compete very readily with a larger boxy floorplan that is maybe closer to 1700 sq ft. Our initial instinct might be to think the 1700 sq ft home is worth more, but sometimes we have to look at the market and let the market speak to us about value instead of bringing in adjustments right away.

Garage Adjustment: It’s understandable to make garage adjustments any time we see a difference in garage count, but in this case properties with and without a 1-car detached garage were selling at about the same level. It’s easy to bust out a knee-jerk $5,000 or $10,000 garage adjustment, but in this case the garages were far away from the actual property, so occupants were using their nearby carports for parking instead, which seemed to lessen the value of the garage. The garage was probably still a marketing point, but I couldn’t justify giving a canned adjustment, so I didn’t give one.

The Big Picture: All the comps adjusted out to $125,000 to $127,000 whether they were slightly larger or smaller and whether they had a garage or not. In this case I reconciled the value to $127,000 because the subject property was on the second floor (generally more appealing) and it did have a garage (still a marketing point). I didn’t give any actual adjustments in the report, but in a sense I adjusted for the value of the components in the final reconciliation since a buyer would consider the subject property as more of a complete package, and thus pay toward the higher end of the market range.

Three Takeaways:

Would Buyers Make this Adjustment? I know the example above is an easy one, but even when a property is challenging we need to still ask the basic question of whether a value adjustment makes sense or not. If you lined up a group of interested and qualified buyers, would they really make the adjustment or not? One of the best ways to know is to begin digging into neighborhood sales. We might hear an owner say, “I paid $70,000 for the rear landscaping, so the adjustment is $70,000.” The key would be to find homes that are similar with decked-out landscaping. When sales already have similar features, they tell us what the market has been willing to pay. What we don’t want to do is guess by using only homes with very average landscaping. This is when we start to say, “Well, I think the adjustment is probably $15,000 or $20,000”. Maybe, maybe not. What have properties with similar features actually sold for?

Focus on the Big Stuff: I recommend not giving small adjustments and instead focusing on the bigger items that probably drive value more such as square footage, condition, upgrades, market conditions, and location. Let’s not get bogged down giving $500 fireplace adjustments, $500 year adjustments, and $1000 covered patio adjustments.

Your Canned List: It’s easy for any of us to get into a habit of giving canned adjustments. If you have a list of adjustments you tend to give, next time you are giving them, ask yourself if the market really behaves that way. If not, maybe it’s time to stop giving them?

Speaking at AI: I actually got to speak on a panel at the Appraisal Institute’s Fall Conference in San Francisco a few weeks ago about this very topic. What an honor!

I hope this was helpful (I promise not all posts will be longer like this).

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